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Thursday, June 6, 2013
Globally: Possible Bubble Burst.
Credit: Overvalued doesn’t apply to the US, but does apply to Europe. Rapid adjustment potential is possible for both. “We have been worried for long by the fact that liquidity simply vanishes during volatile periods,” say UBS strategists. The timing on this is down to the QE exit for the Fed, which UBS says will turn into “absolute negative returns in credit, which could trigger a sell-off.
Hence, credit space valuations do not look unreasonably stretched but the lack of liquidity in the market could engineer an adjustment that looks like a bubble bursting, the report argues.
Real estate in Asia: Too much cheap money flowing around is bound to find its way into real estate. While UBS has singled out Hong Kong as a bubble waiting to burst, the same is true for Indian property as well.
UBS believes physical real estate in Asia is a bubble waiting to burst, especially in Hong Kong which experienced a rapid increase in price. Since the dip in late 2008, the Hong Kong market has gained 123%, a 28% annualised gain. Since mid 2003, it has gained 305%, a 32% annualised gain. UBS blames low interest rates for this rise in property prices.
“In March this year, 76.5% of the mortgage loans had an interest rate between 2% and 2.25%”. In Singapore too prices have inflated due to low mortgage rates.
UBS believes that when the Fed reduces its QE asset purchases and raises rates, this will havedirect repercussions on the cost of funding in Asia, notably for HK real estate. The first quarter of next year is the expected time this pop will happen.
Australian banks: Valuations are very stretched, says UBS due to an increase in risk in their business model. There are several triggers that could pop this market such as a correction in the housing market, funding problems, a downgrade of the Australian sovereign or a general sell-off in risk free rates on the back of the Fed’s exit strategy. However, none of these triggers seems likely in the immediate future.
“The hunt for yield and good fundamentals are likely to support OZ banks in the future but the materialisation of one of the triggers identified could prompt the correction. Here too QE exit could play an important role.”